Bitcoin and all the other altcoins that forked its repo took the world by storm in 2013. A cryptocurrency is a peer-to-peer, decentralized, digital currency whose implementation relies on the principles of cryptography for validation of transactions and generation of the currency itself. Bitcoin is the world’s foremost cryptocurrency. I would go on and and explain in detail how Bitcoins and cryptocurrency as a whole work, but seeing as the primary goal of this post is to examine Bitcoin in relation to the Gartner Hype Cycle, I will point anyone who needs more background on Bitcoins to the following resources, which I found extremely useful:
My advice would be to consume the resources above in the order they are presented. The Quora answer gives a super clear high level description that makes you want more, more akin to a ‘Bitcoin for Dummies’. The ‘Bitcoin Explained’ video is generally helpful, as it quickly touches on all the important elements, from how Bitcoins are mined to the exchanges that they are purchased from all the way down to some common applications. The Forbes article does a good job explaining how Bitcoin differs from Fiat Money. The Bitcoin wiki is also a great resource.
Throughout this post, whenever I use a term that I think might pose a challenge to newcomers to the world of cryptocurrency, I will also include a link to what I believe might be the most helpful resource for clarifying said term.
What is the Gartner Hype Cycle?
Gartner, the world’s leading IT research and advisory company, devised the Hype Cycle as a graphical representation of the stages that many emerging technologies go through, from conception till they attain massive mainstream adoption. In the past, Gartner has attempted to use the Hype Cycle to describe the evolution of many emerging technologies, view a complete list here.
Each Hype Cycle is broken down into 5 overlapping stages as illustrated in the diagram below.
Fig. 1: The Gartner Hype Cycle
Below, I have outlined the 5 stages with explanations as to how I perceive that the 5 stages relate to cryptocurrency. While my intention is actually to attempt to describe the hype cycle for cryptocurrency, Bitcoin generally dominates this space today so it is going to be at the center of this analysis for the most part.
Technology Trigger:
A potential technology breakthrough kicks things off. Early proof-of-concept stories and media interest trigger significant publicity. Often no usable products exist and commercial viability is unproven.It all started in 2008, when a person or a group of people going by the name of Satoshi Nakamoto published a paper describing Bitcoin: A Peer-to-Peer Electronic cash system. There has been a lot of speculation surrounding Satoshi’s identity, but is there is yet to be concrete evidence that verifies any of this speculation.
On January 3rd 2009, Satoshi released the first Bitcoin client and mined the first 50 Bitcoins AKA ‘The Genesis Block’. Satoshi had come closer than anyone before him had to solving the double spending problem (the risk that an individual might spend the same unit of currency twice), one of the biggest ills associated with digital currencies at the time, by keeping a ledger of past transactions made with a Bitcoin in a block chain that is constantly verified by a network of miners. Miners contribute their computing power towards maintaining the integrity of the block chain and are in return rewarded with new bitcoins whenever they discover a new block by way of solving a hard cryptography problem that opens up a new block chain that essentially extends the ledger for storing coin trails. Akin to a central bank printing money, this is how new Bitcoins are generated, and the possibility of getting a reward is what incentivizes many miners to dedicate their sometimes expensive computing resources to the cause.
Built on decades of cryptography research, Bitcoin was clearly at the center of a fundamental breakthrough in the digital currency space, but more than a year after its initial release, Bitcoin’s tiny audience was primary dominated by hard core cryptographers and P2P enthusiasts.
Peak of Inflated Expectations:
Early publicity produces a number of success stories—often accompanied by scores of failures. Some companies take action; many do not.Bitcoin’s first big step into assuming its role as a currency that could be traded for real goods and services was taken on May 21st, 2010, when a Florida programmer, Laszlo Hanyecz, indirectly ordered 2 boxes of pizza from Papa John’s for 10,000 Bitcoin. At today’s 1 BTC to 842 USD exchange rate, this $8.42 million dollar pizza is also probably the most expensive pizza on record.
This phase was primarily marked by important strides taken by entrepreneurs, tinkerers and established companies of varying sizes and can be bucketed into three broad categories as follows:
1. Bitcoin as an enabler for new services:
Many companies that would not have been feasible before Bitcoin began to spring up from all nooks and crannies.
Before MtGox launched as the first major exchange for bitcoin in July 2010, it was painfully difficult to buy and sell Bitcoin. Since then, dozens of other cryptocurrency exchanges have surfaced and Robocoin launched the first Bitcoin ATM in Vancouver that processed $100,000+ worth of Bitcoin transactions in its first 8 day.
Numerous startups such as Coinbase, Tradehill, Bitpay, Bitinstant and Ripple Labs, backed with millions from top tier visionary VC firms like Andreessen Horowitz, have jumped in to make Bitcoin a lot more practical as a currency for the average consumer. The success of many of these venture backed startups relies heavily on how well they can deliver a simple and intuitive transactional experience for the average consumers who can’t be bothered with familiarizing themselves with the cryptic terms that plague cryptocurrency.
Coinbase, with the $25 million in VC money that it has in the bank, seems to have gone further than most in giving Bitcoin the simplicity it needs to go mainstream. With Coinbase all a user needs to do is connect a bank account to the site, like one would normally have to for your average online brokerage, and the user can instantly start purchasing Bitcoins with the cash in their bank account. No mining. No blockchain. No crypto.
It’s not always warm and rosy with Bitcoin startups.
Enter Silk Road, a black market launched in February 2011, and hidden in the darkest shadows of the internet by Tor, free software for enabling anonymity online. The anonymity provided by both Tor and Bitcoin made it possible for Silk Road users to order a limitless range of illegal goods and services with ease from the internet. Ross Ulbricht, Silk Road’s founder, was recently captured on October 2013 when he alleged made an attempt to hire a hitman via Silk Road.
2. Bitcoin as an alternative currency for established companies:
Companies can clearly see the value in using a decentralized currency like Bitcoin. If not for anything else, it means lower transactional fees for them, as the <1% transactional fee that a service like Bitpay charges merchants is much lower than the ‘~2.9% + $0.30 per transaction’ that PayPal would charge similar merchants. For merchants like Overstock that process billions of dollars worth of sales a year, the savings are enormous.
Another thing Bitcoin could do for merchants is to ease processing of international transactions. How? You ask. Unlike fiat money, Bitcoin is geographically independent. One of the big reasons why online merchants find international expansion hard is because they would typically need to set up new payment infrastructure in every new market they expand to. With Bitcoin, merchants can focus on the other logistical pains associated with globalization.
Credit card fraud could also become a thing of the past. Bitcoin transactions are generally somewhat anonymous in that only information about the sender that the receiving party generally sees is the bitcoin address that the funds were sent from i.e. useless information to any hacker. Contrast this to the last form you filled out on that random e-commerce site that asked you to enter all your credit card information, and you would see why Bitcoin might actually be a more natural fit for the internet than fiat money.
Although it sounds like a no-brainer for online merchants to accept Bitcoin, there are still very many fundamental problems that cloud Bitcoin as a currency (which I will address in a future section) and these problems make it incredibly difficult for many merchants to take the leap to accepting Bitcoin as payment for goods and services rendered.
3. Bitcoin as a base for enhanced altcoins:
Satoshi did not stop at releasing a paper that described how the currency works, he/she/they also put up the entire source code on Github. What this means is that everyone and their mother, that is of course the mothers who fancy cracking out a line of code every now and then, has access to the entire Bitcoin repo, and can fork and modify the source code to create alternate coins as they please.
While a number of Bitcoin fanatics such as Gavin Andresen see the openness as an opportunity to continuously iterate on the Bitcoin project in order to directly make it better, many others also see more potential in building entirely new coins. As of the time of this writing, there are more than 80 altcoins in existence, many seem to be pump and dump scams that have simply forked Bitcoin’s repository and changed a bunch of insignificant parameters like the name and total number of coins that can be generated. Some have significant differences. Litecoin for instance has a few key differences that supporters hope would make it triumph over Bitcoin, the biggest of which is the scrypt algorithm that it uses for its proof of work that makes it easier to mine on a CPU. There are a number of other interesting coins like Namecoin (uses the blockchain as a DNS server), Primecoin (searches for chains of prime numbers as proof of work as opposed to the SHA-256secure hash algorithm that Bitcoin uses) and Dogecoin (Litecoin-derived coin whose major innovation was around viral marketing by using the Shiba Inu from the Doge internet meme as its mascot).
Many of these altcoins are interesting because, the cryptocurrency space is still highly experimental at this point, and while I believe that it is a given that cryptocurrency is going to see huge mainstream adoption at some point in this life or the next, there is also a small chance that the currency that takes cryptocurrency to the major leagues might not be Bitcoin, but rather one that uses Bitcoin as a base to build a better coin, much in the same way that Altavista was the first and most popular natural language search engine at some point, and now you have to go Google ‘Altavista’ in order to figure out what Altavista was. There is also a chance that Bitcoin would gain a strong network effect with a mainstream audience at a pace quick enough that it might be difficult to take any other altcoin serious in future.
Trough of Disillusionment:
Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investments continue only if the surviving providers improve their products to the satisfaction of early adopters.This is where things get a little tricky for me, and I say that because I suspect that while cryptocurrency as a whole, is not yet quite at the trough, it has been steadily approaching the trough of disillusionment over the past couple of months. Remember that the stages of the hype cycle are generally overlapping, so there is no explicit start or end point for any single stage. We can only detect key symptoms of certain stages and consequently map stages to relevant occurrences.
Cryptocurrencies have faced a number of problems with impact level ranging from huge to minimal and these problems that have led many skeptics such as Paul Krugman and Charlie Stross to dismiss the entire space as a moving fad. The biggest challenges are outlined below:
Extreme Volatility
When Bitcoin hit $10, many thought it had peaked, then it hit $100 a few months later and everyone was certain that there it could not go any higher, but when it went past $1000 only 7 months later, it became clear that the gods were crazy. Bitcoin has seen 100% jumps overnight and similar 50% value drops overnight. No one knows how high Bitcoin’s value could go, because its intrinsic value is based 100% on the demand for it, if it goes mainstream, its value could possibly jump to $100,000, if the community abandons it tomorrow, its value drops to $0.
This fickle nature of Bitcoin creates problems both for the consumers and for merchants.
On the consumer side of things, it creates a big hoarding problem. People hoard their Bitcoin in order to avoid ending up like our friend Laszlo Hanyecz who essentially spent over $8,000,000 on two boxes of pizza. Much like common stock, if its value ever goes up, hoarders would want to hold as much as they possibly can so as to maximize their gains. This begs the question, What good is a currency if people are scared to spending it?
Merchants fear the opposite. Someone bought a $100k Tesla with Bitcoin in early December 2013 and by December 18th the value of the Bitcoin used to purchase that $100k Tesla was down to ~$50k.
In order for both parties to be comfortable using Bitcoin as a medium of exchange, its expected value has to to be relatively stable and predictable in the long run.
2. Prime Target for Regulators
Silkroad’s Ross Ulbricht is not the only person who has figured out that Bitcoin’s anonymity could be used to do a lot of evil. Bitcoin powers many underground marketplaces such as Agora, The Marketplace, Blue Sky and Pandora and all are vying to fill the hole that Silk Road left behind. Bitcoin fanatics would have to give regulators substantive proof that the merits of Bitcoin outweigh the ills that the currency enables.
Bitcoins legal status varies from country to country, Thailand has outrightly banned Bitcoin, China has has banned financial institutions from handling Bitcoin transactions (the next best thing to an outright ban). Regulators in many other countries are still contemplating on the amount of regulation that Bitcoin is going to need. The only country that has outrightly recognized Bitcoin as a legal currency so far has been Germany. See a semi-complete list of Bitcoin and its legal status in countries worldwide here.
Slope of Enlightenment:
More instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. Second- and third-generation products appear from technology providers. More enterprises fund pilots; conservative companies remain cautious.USV partner, Albert Wenger, wrote a very interesting post back in October titled Bitcoin as a Protocol in which he likened Bitcoin to the Hypertext Transfer Protocol, the underlying protocol that powers the world wide web. I think this is a very fascinating way to look at things because in the same way that Bitcoin makes it possible for anyone to seamlessly transfer currency to anyone, http makes it possible for a remote server to seamlessly transfer data to any web browser. The full capabilities of the http protocol were not clear 20 years ago and they are still not 100% clear to us even to this very day, as services that have been delivered over http have evolved over time and are still evolving.
It think Bitcoin as a protocol might be approximately at the stage where http was back in 1994, the first generation of search engines, web browsers, and online directories were surfacing, each trying to solve the the biggest problems they envisioned could be solved via the world wide web at the time in a manner that while revolutionary then might come off as rudimentary today. In the same vein, many of the Bitcoin startups today are still trying to figure out how to get consumers to perform the most basic transactional tasks with Bitcoin.
The next generation of cryptocurrency startups might try to solve much more complicated problems, like Wenger mentioned in his post, Bitcoin enables distributed contractswhich could be used to establish contractual agreements between parties in a way that requires minimal trust. There are a couple of use cases here, for example one could establish a trust fund that could be automatically disbursed to an address that one’s child controls after a certain predetermined date. Another could be having a third party act as a mediator for a trade between two parties that have no history, for example in a trade with an Indian web designer who requires a deposit, imagine if you could send the deposit into an address that the web designer owned with a programmatically attached clause that wouldn’t actually allow the designer to spend the deposit until an intermediary such as oDesk determined that the web designer had completed the task satisfactorily.
Mark Andreessen, managing partner of Andreessen Horowitz and a key contributor to the world wide web’s development via the Netscape browser, wrote an article in the NYT where he also pointed out a few other possible future applications for cryptocurrency. One idea that resonated strongly me was around applications that allowed people send money to loved ones across international lines. Being an international student in NYC at some point, I know that it took a great many steps for my family to remit my fees internationally. I can see how valuable it would have been if my university had a portal where international families could easily send Bitcoins to for tuition payments.
While we are on the topic of Bitcoin’s potential value in international markets, I know for a fact that because of a dearth and mistrust of payment infrastructure in my native country, Nigeria, eCommerce startups and other companies that requires online transactions to take place tend not to thrive and those that do tend to do so in unconventional ways. Jumia, tagged by some as the Amazon of Nigeria, innovates around the lacking payment infrastructure by accepting payment on delivery. I can definitely see how Bitcoin could provide the trustworthy payment system that companies like Jumia need to operate at scale.
Plateau of Productivity:
Mainstream adoption starts to take off. Criteria for assessing provider viability are more clearly defined. The technology’s broad market applicability and relevance are clearly paying off.This phase fully depends on the previous phase being successful. If a number of 2nd and 3rd generation of applications can prove Bitcoin’s value to an audience that is not limited to hackers and cryptographers, and e-money begins to sees huge acceptance among regulators and adoption with a mainstream audience, rules for measuring the viability of entities built off the bitcoin protocol will surface almost organically. As was the case with world wide web, regulators will draw up laws specific to cryptocurrency that address important issues such as methods of taxation, and analysts will derive metrics that would be used to evaluate the viability of new cryptocurrency startups.
I currently don’t hold any Bitcoin mainly because the uncertainty that clouds it today makes it a terrible store of value, and I generally would love to be able to fall asleep at night without having to worry about whether my Bitcoin will be worth nothing by the time I wake up in the morning. I do however own a quantity of Dogecoin that required an investment from me so insignificant that I might not be in tears if it went to zero tomorrow. I hold Dogecoin partly because I find it fun, and partly because of the amazingcommunity that backs the currency.
This entry was posted on Wednesday, January 29th, 2014 at 11:21 am and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed.
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